Leases

IASB meeting summaries and observer notes

IASB April 2010

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Accounting for sale and leaseback transactions

The IASB and FASB tentatively decided that a sale and leaseback transaction should be accounted for as a sale and leaseback, rather than as a financing, if it is determined that the underlying asset has been sold. The underlying asset has been sold if, at the end of the contract, control of the underlying asset has been transferred, and if all but a trivial amount of the risks and benefits associated with the underlying asset have been transferred to the buyer/lessor.

The boards also tentatively decided that if a sale and leaseback transaction results in a sale of the underlying asset, and if both the sale and the leaseback are established at fair value, gains or losses arising from the transaction should not be deferred. If the sale or the leaseback is not established at fair value, an entity should adjust the asset, liabilities, gains, and losses that have been recognised, to reflect current market rentals.

Lessor accounting for the performance obligation

The IASB and FASB tentatively decided that the amortisation of the performance obligation should be performed in a systematic and rational manner, based on the pattern of use of the underlying asset by the lessee (for example, over time, based on hours of use, etc.). The boards instructed the staff to provide additional analysis on when and how revenue should be recognised upon lease commencement.

Accounting for subleases

The IASB and FASB tentatively decided that:

An intermediate lessor, as a lessee in a head lease, should account for its assets and liabilities arising from the head lease in accordance with the lessee model developed by the boards. Similarly, the intermediate lessor, as a lessor in a sublease, should account for its assets and liabilities arising from the sublease in accordance with the lessor model developed by the boards.

Intermediate lessors should present all assets and liabilities arising from lease contracts with subleases, excluding their obligation to pay rentals to the head lessor, together in the statement of financial position, gross with a net subtotal. The obligation to pay rentals to the head lessor should be presented separately.

Intermediate lessors should disclose in their financial statements the nature and amount of significant subleases.

Lessor accounting for impairment of assets

The IASB and FASB discussed impairment of assets under the performance obligation approach to lessor accounting. The boards instructed the staff to develop a flowchart to show how the interrelationship between the lease receivable, the performance obligation, and the underlying asset would be assessed for impairment.

Accounting for long-term leases of land

The IASB and FASB tentatively decided that long-term leases of land would not be excluded from the scope of the proposed new leases requirements for lessees and lessors.

Lessor accounting for purchase options

The IASB and FASB tentatively decided that purchase options would be accounted for by lessors in the same way as lessors account for renewal or termination options. Consequently:

Purchase options would not be recognised as separate assets.

A lessor's receivable and performance obligation would be measured on the basis of the lease payments that would be received; the lessor would therefore decide whether it is more likely than not that an option to purchase will be exercised. If the lessor decides that the option to purchase is more likely than not to be exercised, the lease receivable would include the exercise price of the purchase option.

The exercise of the purchase option would be reassessed at each reporting date. Detailed examination of every lease would not be required unless there is a change in facts or circumstances that would indicate that the purchase option would be exercised.

Any change to the lease receivable resulting from a reassessment of the exercise of a purchase option would be recognised as an adjustment to the performance obligation.

The lessor's performance obligation relating to rental payments would be recognised in income over the lease term in a manner that depicts the consumption pattern of the underlying asset that the lessor is providing to the lessee. The lessor's performance obligation relating to the purchase option would not be recognised in income until the purchase option is exercised.

Lessee presentation of total cash rentals paid

The IASB and FASB tentatively decided that no additional disclosures of the total cash rentals paid would be required on the face of the financial statements. That information would be disclosed in the notes to the financial statements for each period presented, as part of the reconciliation between the opening and closing balances for the lessee's obligation to pay rentals.

First time adoption under the proposed new leases requirements

The IASB tentatively decided that:

First-time adopters of IFRSs should apply the same proposed transitional requirements as do other lessees and lessors. That is, lease assets and liabilities should be recognised and measured at the present value of the lease payments for all leases

A first-time adopter should not apply the relief for simple finance leases. Instead, simple finance leases should be accounted for in the same way as all other leases are on first-time adoption.

Consequential amendment to IFRS 3 Business Combinations

The IASB tentatively decided that at the acquisition date, the acquirer would measure the acquired lease asset and liability in accordance with the proposed leases requirements. Fair value measurement at the acquisition date would not be required.

Consequential amendment to IAS 40 Investment Property

The IASB tentatively decided that:

If an entity elects to use the fair value model, its right-of-use asset classified as an investment property is subsequently measured at fair value in accordance with IAS 40 Investment Property. Consequently, the new lessee accounting requirements on subsequent measurement would not be required

If an entity elects to use the cost model, the new lessee accounting requirements for right-of-use assets would be required. Consequently, the requirement under IAS 40 to subsequently measure investment property at depreciated cost using the cost models in IAS 16 Property, Plant and Equipment would be replaced with the new lessee accounting requirements

If the right-of-use asset is measured at fair value, adjustments to the obligation to pay rentals arising from changes in the lease term or from changes to estimated contingent rentals would be recognised in profit or loss.

Revaluation of the right-of-use assets

The IASB tentatively decided that:

A lessee should be permitted to revalue its right-of-use assets even if there is no active market in the right-of-use assets.

If the lessee chooses to revalue its owned assets in a class of property, plant and equipment, a lessee should be permitted to revalue its leased assets (right-of-use assets).

A lessee should be required to revalue the entire class of property, plant and equipment (comprising all owned and leased assets) to which that leased asset belongs if the lessee chooses to revalue its leased assets.

Lessor disclosure requirements

The IASB and FASB tentatively approved a set of disclosure requirements for the forthcoming Exposure Draft.

An entity would disclose the quantitative and qualitative financial information that:

identifies and explains the amounts recognised in its financial statements arising from lease contracts

enables users to evaluate the nature and extent of the amount, timing, and uncertainty of cash flows arising from lease contracts and how the entity manages those cash flows.

These disclosures would include:

The nature of the lease arrangement, if leasing arrangements are a significant part of the lessor's business activities in terms of revenue, net income, or assets, disaggregated (for example, by nature or function), including:

A general description of those leasing arrangements

The existence and terms of renewal, termination, and purchase options

A description of how the effect of contingent rentals on the carrying amounts of the lease receivable and performance obligation is determined

Initial direct costs incurred.

In addition to the disclosures already required for the leased asset, a description of any restrictions placed on leased assets as a result of any lease arrangements and a description of the existence and terms of any residual value guarantees.

For its lease receivables, a maturity analysis on an annual basis for the first five years, and a lump sum for the remaining amounts, comparing the potential differences in cash flow attributable to those that are the minimum contractual receivables and those that are the total estimated lease receivable. A lessor would not be required to disclose the fair value of its lease receivable.

The disclosures required by the Revenue Recognition project for its performance obligations. For example, a lessor would disclose a maturity analysis surrounding the satisfaction of performance obligations. For all remaining performance obligations in contracts expected to be completed after one year from contract inception, an entity would disclose the amount of the transaction price allocated to the performance obligations that are expected to be satisfied between one and two years, between two and three years, and after three years from the end of the reporting period.

A reconciliation between opening and closing balances for its receivable and its performance obligation. That reconciliation would follow the disaggregation principle in the Financial Statement Presentation project to provide useful information. The boards asked the staff to consider whether changes (for example, increases and decreases attributable to changes in estimates due to options, contingent rents, and residual value guarantees) should be shown gross or net.

For IFRS preparers, information relating to risks surrounding a lease receivable in accordance with IFRS 7 Financial Instruments: Disclosures, and for U.S. GAAP preparers, information in accordance with the proposed Accounting Standard Update relating to credit quality upon final issuance to help users to evaluate the nature and extent of the amount, timing, and uncertainty of future cash flows arising from lease contracts, and the way in which the lessor manages those uncertainties.

The fact that a lessor has applied a simplified form of lease accounting for short-term leases, if applicable. The lessor would also disclose the gross amount recognised in the statement of financial position that was accounted for under the simplified accounting model.

Lessor accounting for impairment of assets

The IASB and FASB discussed impairment of assets under the performance obligation approach to lessor accounting and tentatively decided that the lease receivable would first be evaluated for impairment. Any impairment to the lease receivable would result in an adjustment to the lease receivable and the performance obligation, with any difference being recognised in profit or loss. Lessors would also have to evaluate their leased asset for impairment. The boards instructed the staff to consider further how the underlying asset would be assessed for impairment under IAS 36 Impairment of Assets, and the impairment guidance in Topic 360 Property, Plant and Equipment of of the FASB Accounting Standards Codification�.

The boards will continue discussion of lessee and lessor accounting at their May 2010 meeting.